Interest only Loans 2016

Only interest rate loans 2016

Despite risk only loans back in fashion
Securitised loans, which have a pure interest (IO) repayment pattern, are considerably worse than conventional mortgage loans - and they are becoming more frequent, according to the Fitch Ratings study. Since 2016, the share of CMBS trust consisting of loans that only demand interest paid - not repayment of capital debts - has increased by more than 50 per cent.

On an annual basis, about one third of the typically occurring loan type consisted of loans without redemption payment until due date. Loans of this kind account for more than half of the overall 2018 budget deficit for standard operations. According to Ryan Frank, the main contributor to the Ford Group' s paper, this relationship is still a long way from the flood line from the global economic downturn, when some 75 to 80 per cent of loans only needed interest payment for the entire term.

Nevertheless, investor confidence in the fast spread of such loans may be worrying. "That' s a fairly significant change when you consider that full-time IO loans actually began with a lower loan-to-value ratio," Frank said in an interviewer. In addition, IO loans have in the past been the cause of accumulated loss of approximately 5 per cent of their CMBS trust, compared to 4 per cent for loans with default amortisations.

This burial "shows a significant change in the mean effect on CMBS trusts," Frank said. Several of the largest CMBS deals that have reached investor level in recent months show how widespread IO credits have become. As part of the $420 million BDS 2018-FL2 deal this past month, 18 of the 19 securitised mortgage loans only need interest payment in the event that their original conditions are not met.

In fact, savers have even shown an interest rate craving for pure single-asset interest rate trades where not a cent of the trust's total indebtedness is paid back before redemption. This is the case with this month's GSMS 2018-RIVR transaction, a $110 million IO securitization of a 1.7 million sq ft Chicago business center of Goldman Sachs. According to Fitch, his solvency assessments explain the dull performance of IO loans by taking a sceptical look at issuers' forward-looking distressed cover assessments and predicting that even the toughest IO loans will depreciate ten per cent of their value.

Frank is worried, however, that if the full burden of an IO loans falls due at a higher rate of interest - almost certainly, given today's low-cost lending - locating accessible refinancing could be a big job. "We believe that one of the greatest exposures to CMBS lending in today's trust is to fund the risk," he said.